What Is Factoring in Trucking? An Owner Operator’s Guide to Truck Invoice Factoring
A hiccup or wrench in a supply chain can be painful to a small business’s cash flow. We’ve seen this a lot recently, with the supply chain problems happening globally.
While you’re waiting for the next cargo ship to unload or a shipment to pass through the evolving COVID approval process, your invoices are piling up.
You might not realize it, but you don’t have to sit on that ever-growing accounts receivable and wait.
You can use trucking invoice factoring to get the working capital you need — fast.
What’s invoice factoring in trucking, and how can it work for you?
Are there similar alternatives and how do you choose?
This article explains all the details so you can make informed decisions to get you through your next cash crunch.
We’ll discuss different types of factoring:
1. What Is Invoice Factoring?
Invoice factoring is a method of funding many businesses use to get quick cash without taking out a loan.
Instead of waiting for a customer to pay their outstanding invoice, the business owner can sell it to a third-party factoring company.
The factoring company (or factor) pays the business owner in two installments. The first is about 60-70% of the total invoice amount.
After the factor collects from the other party directly, they in turn pay the business owner the second installment (the rest of the amount due minus the factor’s fees and expenses).
Freight Trucking Factoring
A freight factoring company works the same way but simplifies the process for truckers.
As soon as you get your invoice, you submit it to the factoring company. They pay you within one business day and then collect from the client.
Since truckers frequently need one invoice paid to cover their next job or for expensive fuel advances, factoring is popular in the freight industry. It opens up cash flow, and freight factoring companies typically take over the billing and collections.
A truck factoring company can deposit your money through ACH accounts, wire transfers, or straight onto a fuel card. All you have to do is submit your Bill of Lading (BOL) and Rate confirmation to create the invoice through the online portal, and the rest is done for you.
Freight vs. Invoice vs. Spot Factoring Services
Although you’re in the trucking industry, you don’t have to use freight factoring. Most of these companies are contract-based, and they take over your billing and accounts receivable.
You sell them all your invoices, whether you need the money right away or not, and you pay the fees on each invoice. That can add up to a hefty financial loss.
Regular invoice factoring companies do the same thing.
Unless you’re looking for someone to take over the billing and get it out of your hands entirely, it’s not an optimal solution. But you can still get rid of those unpaid invoices in a cash flow crunch by using spot invoice factoring.
With spot factoring, you partner with an invoicing company, and when you need some extra working capital, you sell them an invoice or two (or a few). You keep control of your books and handle the billing in your own back-office on a regular basis.
Related: What Is Spot Factoring? You May Know it As Single Invoice Factoring
2. How Can Truck Invoice Factoring Help My Small Business?
The benefits of occasional invoice factoring versus taking out a loan are substantial.
For one, you get fast cash on hand without long-term loan payments.
Since the clients are the ones paying, your business isn’t under scrutiny, so there are easier approval qualifications. This is advantageous for new businesses or those with bad credit history.
Invoice Factoring in Action
Factoring can help your business in a pinch.
When you need working capital to take on a large order, and you don’t have sufficient funds in the bank, sell an invoice.
You can sell an invoice when you find a too-good-to-be-true sale on equipment, but you don’t have the cash to take advantage of it.
Or, what if you simply find yourself running low on cash with monthly expenses to cover?
Selling an invoice can prevent thousands of dollars in late fees and penalties.
In those situations, the money you save or make is more than the factoring rates from selling an invoice. It becomes a cost-effective financial strategy.
Discover: 7 Things to Know About Semi-Trailer Financing [+ Alternatives]
3. What Are the Pros and Cons of Invoice Factoring in Trucking?
Invoicing is a smart business strategy that attracts larger vendors to your company. Yet waiting around for an invoice to get paid by a large client like Coca-Cola, for instance, can be devastating to a small business.
You’ve invested tens of thousands of dollars in getting the supplies to their destination. Then the workflow processes of a mega-company can take months for the wheels to turn far enough to get you paid.
How Invoice Factoring is a Game-Changer
Invoice factoring lets you take on the giants in your industry by offering longer payment terms without strangling your cash flow pipeline.
One of the most attractive features of invoice factoring is that there aren’t credit checks on you or your business.
The factoring company can choose to screen any clients for creditworthiness before they buy your invoice. They have the option to decline those with a low credit score or other characteristics they deem too risky.
There’s no extra collateral required because the invoice is the collateral. Once the client has paid and you get your money, the transaction is over. There are no messy loans to keep paying on and no added interest and fees.
Know the Rules Before You Play the Game, Though
As impressive as these benefits can be, there are a few things you should consider.
1. With an invoice factoring company that takes over your accounts, you lose control of which invoices you sell. The factor buys them all and collects from the clients directly.
This can interfere with your client-business relationship if they aren’t comfortable with a third party accessing their information.
2. Before you sign a factoring agreement, check the fine print. You may find hidden fees, including interest that compounds weekly or monthly until the clients pay. Watch for early termination fees and monthly minimum charges, and avoid signing long-term contracts.
3. Keep an eye out for recourse factoring terms as well. If you agree to a recourse clause and the client doesn’t pay, you’re responsible for covering the invoiced amount, plus fees. That can become an expensive, unexpected hit to your wallet.
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4. What Do the Best Invoice Factoring Companies Look Like?
If you know what you’re looking for, you can partner with a reputable company on an as-needed basis.
But what does “reputable” mean when it comes to factoring?
Like with any lender, you want to see the terms upfront with no hidden fees, and you want to be in control of your accounts receivable.
Accelerating Your Invoice Payment With Now
Now’s unique invoice acceleration program works similarly to invoice factoring.
You’ll know ahead of time how much it will cost you to sell each invoice. We include all of our factoring fees in the low rates we quote you during your application process.
Applying is simple. You don’t need to upload a Bill of Lading or other transportation industry documents. Simply submit the invoices you want to sell, and let Now take it from there.
Now also has non-recourse factoring options. If we run a free credit check and agree to pay you the invoice value and then your client doesn’t pay — you’re not responsible for the amount.
5. Are There Alternatives to Invoice Factoring for My Trucking Company?
Invoice factoring is a solution for you as an owner-operator or small freight business entrepreneur. But it’s not the only one.
Alternatives to Invoice Factoring
If your transportation company has too many freight bills and not enough working capital, but you don’t want to sell invoices, check out these common financing options.
Short Term Loans
A short-term loan is one way to get working capital quickly and avoid years of monthly payments. Unlike traditional loans, you can apply for short-term loans online and choose from various private lenders.
The benefits of these financial alternatives include:
- Fast approval or denial, usually within minutes
- Higher loan amounts than you may be able to get by selling a few invoices
- Easy application process
- No collateral necessary
Disadvantages include higher interest rates and setup, processing, and early repayment fees.
You’ll also have to pay the loan back quickly. The average short-term loan has an 18-month repayment plan. This can be a pro or a con, depending on your financial needs.
Business Line of Credit
A business line of credit lets you use your “credit card” to access a predetermined pool of funds in a revolving account. If you borrow money from this pool and pay it back, you can use it again and again until the loan terms expire.
With a business line of credit, anything outstanding at the end of the term is paid off in set monthly installments.
This option may require good credit and/or collateral, but it works well for businesses that only need extra cash occasionally instead of in a lump sum.
Merchant Cash Advance
Do your clients pay via credit cards regularly?
If so, you can qualify for a merchant cash advance (MCA).
Yes, this type of financing is that easy to get approved for. However, it comes with a substantial catch.
MCAs are the last resort option of financing. You have a pretty good chance of getting approved, you may be able to get the funds you need within hours, and it doesn’t matter if you have good or bad credit.
The downside to this is that an MCA lender gives you the money you need, but with a hefty interest rate. In fact, don’t be surprised if your APR falls in the range of 40% – 350%.
It’s one of the rare occasions where it’s better to use a credit card than a loan.
The second problem with an MCA is that the lender gets access to your bank account, and they take out a portion of your credit card payments every day. It doesn’t matter if you earmarked that money for something else; the lender gets their cut before anything else is covered.
A $10,000 MCA loan can end up costing you double that or more by the time you pay it off. If you really need immediate cash, you have this option. Just make sure you can handle the repayment terms and exhaust every other possible solution first.
See also: Your Full Guide to SBA 7(a) Trucking Loans and What You Need to Know About Trucking Business Loans
Trucking companies are expensive to run, especially when they’re successful. When you regularly use invoices, it’s challenging to juggle your finances and overhead while awaiting customer payment.
Once you understand how to use freight invoice factoring to your advantage and partner with a reputable company like Now, these financial obstacles become minor inconveniences.
Ready to get started? Create your NowAccount to see if you qualify for accelerated invoice payments!